The Equity Premium Implied by Production

Urban Jermann

No 12487, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the determinants of the equity premium as implied by producers' first-order conditions. A closed form expression is presented for the Sharpe ratio at steady-state as a function of investment volatility and adjustment cost curvature. Calibrated to the U.S. postwar economy, the model can generate a sizeable equity premium, with reasonable volatility for market returns and risk free rates. The market's Sharpe ratio and the market price of risk are very volatile. Contrary to most models, the model generates a negative correlation between conditional means and standard deviations of aggregate excess returns.

JEL-codes: E23 G12 (search for similar items in EconPapers)
Date: 2006-08
New Economics Papers: this item is included in nep-bec, nep-dge, nep-fin, nep-fmk, nep-mac and nep-upt
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Published as Jermann, Urban. "The Equity Premium Implied by Production." Journal of Financial Economics. Volume 98, Issue 2, November 2010, Pages 279-296

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Related works:
Journal Article: The equity premium implied by production (2010)
Working Paper: The Equity Premium Implied by Production (2005)
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